Gift Card Fraud Prevention: How to Stop These 7 Common Scams

Do You Know the Top 7 Gift Card Fraud Scams Affecting Consumers & Merchants?

Gift card fraud is on the rise. This shouldn’t come as a big surprise; reports show the US gift card market is expected to grow from roughly $163 billion in 2019 to over $221 billion by 2024.

The motivation for fraudsters here is simple. Gift cards are effectively the same as cash — they’re easily transferable, hard to track, and once they’re spent, it’s unlikely that a user will be able to recover the funds. All facts that fraudsters are eager to exploit.

So, why is prepaid card fraud such a concern? Does it affect merchants and consumers equally? Most importantly, what can you do to stop it?

The Current State of Gift Card Fraud

Generally speaking, gift card fraud is any scam or act of fraud revolving around the reception or provision of prepaid gift cards. There are two main forms of gift card fraud: gift card payment fraud and outright gift card theft.

The first thing you need to know is that no legitimate party will ever insist that you pay for any goods or services with a gift card. For example, one fraud tactic that’s become very common in the last decade involves a criminal posing as a governmental official, like an agent of the IRS or the Social Security Administration.

The fraudster claims you owe money, and that your bank account will be frozen for an investigation. They instruct you to buy an Amazon or Apple gift card and pay off the amount owed using the card balance to avoid getting arrested or suffering other consequences.

There's no such thing as a "fraud-proof" payment. If you're operating in the eCommerce space, you'll always be susceptible to fraud and chargebacks.

If anyone ever instructs you to pay with a gift card specifically, they are a scammer. Period. These scams should be reported immediately to the FTC at ReportFraud.ftc.gov. This may seem obvious to some, but it works surprisingly often.

More and more people are being cheated through gift card schemes. Also, the victims are losing more money. In 2018, the median amount victims lost to a gift card scammer was $700. This year, it’s $1,000.

Older people are more susceptible to these scams, according to FTC data. Of Americans aged 50-59, 19% of fraud reports involved gift cards or reloadable cards. For Americans aged 80 and up, that number jumps to 30% of all fraud reports.

How Gift Card Fraud Works

There are multiple ways to commit fraud through gift cards. Some of them are quite sophisticated.

For example, thieves may employ an automated algorithm to roll through a list of potential account numbers and request the balance. If the result of any query returns a positive balance, the fraudster knows the account number is legitimate, and that the account contains funds.

With just those two pieces of data, cybercriminals can purchase as much as the card balance will allow. They do this knowing that the cardholder may not discover the crime for weeks or months. Indeed, it may never be discovered at all.

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CBS News reported that 3% of gift card dollars are never redeemed. That amounted to roughly $3 billion in 2019 alone.

As we mentioned, there are many different methods of leveraging gift cards for fraudulent purposes. Some are simply variations on other types of card-not-present fraud, while others are specific to gift cards. A few of the more common schemes involve using:

Stolen account data

Fraudsters buy gift cards online using stolen credit card information, then turn around and resell the cards for cash. They do this because, if the owner of the stolen data discovers the illegitimate purchase, the gift card could be canceled. Knowing this, the fraudster wants to convert the card for cash or merchandise quickly.

Account takeover

Fraudsters can gain access to multiple connected accounts by hacking in and commandeering one account held by a legitimate cardholder. The fraudster is able to access a bank or online shopping account, for instance. Then they convert as much money as they can siphon off into untraceable gift cards to sell or make purchases as quickly as possible.

Loyalty points and rewards

Loyalty and rewards accounts that offer gift cards are popular targets. The accrued points can be easily converted into digital gift cards. This makes them very easy to monetize.

Phony balance checks

Thieves watch for gift cards that go up for sale in online marketplaces, then contact the seller to buy the card. They insist on a three-way call to verify the balance with the retailer. The third-party, of course, is the fraudster’s partner, who simply copies down the gift card information when offered.

The Top 7 Gift Card Fraud Scams & How to Respond

The goal of a gift card scammer is to trick you into signing over a gift card balance. The specific tactics they use can vary based on the situation, though. Here are a few of the most common gift card schemes at work right now:

The government scam

Someone from the IRS or the Social Security Administration is telling you that you owe money. A warrant is about to be issued for your arrest, but you can stop it by making a one-time payment via a gift card.

First of all, the government will send you written documentation if you have outstanding debts. If anyone calls you out of the blue like this, hang up and call the agency yourself through their official channels. NEVER give out any personal information to a cold caller.

The tech support scam

Someone from Apple or Google calls to inform you that there is something wrong with your computer. You will need to pay them using a gift card to get it fixed.

Ask yourself: how would someone from either company remotely diagnose a computer problem? That’s not how the technology works. So, if anyone calls you demanding payment for services of any kind, hang up. It’s a scam.

The dating scam

If you’re chatting with someone for a while and they suddenly start asking you for money, immediately stop talking to them. This fraudster will usually try to get you to “help them out” by sending them a prepaid Amazon gift card or something which they could use to buy groceries or whatever they claim to need. In reality, they’re just leveraging your emotions to scam you.

Never send any money to someone you don’t know. Going off that point, never arrange gifts or gift cards for people you haven’t met.

The friend in need

Someone calls you and claims to be a friend or family member (or someone calling on their behalf). The person says they’re in trouble, and asks for money but instructs you not to tell anyone, as it’s a delicate situation.

If this happens, tell them you’ll call the friend or family member back from your own phone. Contact the person yourself to check on them, then immediately call the police to report the number the scammer called from.

The prize winner

Someone contacts you to claim a prize. First, though, you have to pay convenience fees, shipping costs, or some other charges with a gift card.

You obviously can’t win any sweepstakes you didn’t enter. So, naturally, this is also going to be a scam.

The utility scam

Someone from your power or water company calls to tell you that there is a problem with your bill. The caller threatens to cut off your service if you don’t pay them with a gift card or some other card payment.

Utility companies do not accept payments this way. If your services are about to be cut off, you will be notified several times in writing, as required by law.

The check scam

Someone writes you a check for a car or some other item you have for sale, but the amount is more than the total purchase price. When you ask why they overpaid, the scammer will claim it’s for shipping and handling or something else. They will then request that you pay the difference through a gift card or some other form of payment.

This is a common scam on sites like Craigslist and the Facebook Marketplace. You should never accept or cash a check written for more than the listing price of an item. The check is always bad, and you will lose the money you send to them by whatever means.

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If It's Already Happened…

We now know how you might be targeted, and how best to respond to these scams. What do you do if you’ve already been a victim of prepaid card fraud, though?

Here are a few steps that you should take:

Call the police and file a report. This may also help you gain assistance from the gift card issuer.
Contact the gift card retailer to report the fraud. They may ask you to share your receipt and other purchase information for a possible refund.
Contact the FTC to report the fraud and explain the situation in great detail. Dates, times, phone numbers, and any screenshots of messages are excellent information that can help the FTC prevent future cases.

Another thing you could do to help fight back against any future instances of gift card fraud is to contact your state attorney general to report the case. While the FTC is the main governing body with regard to fraud, individual cases may become parcel to larger class-action lawsuits or other legal proceedings that can prevent the victimization of others.

Gift Card Fraud Affects Merchants, Too

We’ve discussed how criminals can make illegitimate purchases using fraudulent gift cards, and how this hurts consumers. What about businesses, though?

There are other specific threats that apply to brick-and-mortar stores that display and sell prepaid gift cards from other merchants. Take “pre-stolen” card numbers, for example.

Typically, prepaid gift card displays aren’t heavily guarded because the cards themselves are useless until activated. A thief can smuggle a few out, copy down the numbers, then re-hang them in the store.

By regularly checking the online balance for those card numbers, the fraudster will see when one is activated, then drain the account through online purchases. The buyer assumes the card was not loaded properly, and either requests a refund or files a chargeback.

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UPC scams are another common practice related to gift card fraud.

Like the scheme outlined above, this involves the theft of several blank cards. In this case, however, the fraudster actually buys a card, then copies the UPC barcode of that card onto stickers. The stickers are placed over the real UPCs of the stolen cards, which then go back to the store. Whenever any of those cards are activated, the fraudulent code is scanned, and the balance goes straight into the fraudster’s “legitimate” account.

Merchant Risks Associated With Digital Gift Cards

What about digital or electronic gift cards, though? Since there’s no physical card, fraudsters can’t conduct UPC scams or “pre-steal” the cards. Right?

The truth is that digital gift cards offer perks for scammers, too. The fact that the “cards” are intangible means they can be converted to cash even more quickly.

The risk is greater still if a merchant’s database of available card numbers is breached. In that situation, fraudsters could gain access to many more than they could have taken if the cards in question were physical cards.

In some cases, the fraudster could steal thousands of gift cards in a single incident. The merchant may be stuck honoring thousands of gift cards that were never purchased.

How Merchants Can Avoid Gift Card Fraud

The holiday season is prime time for all types of fraud, including gift and prepaid card fraud. However, trying to mitigate the risk of gift card fraud puts merchants in a tough spot. Manually reviewing transactions for indicators of potential gift card fraud takes time, and that’s one thing retailers won’t have amid hectic holiday sales. Fraudsters know this and use it to their advantage.

Some merchants have found moderate success with making adjustments to sales policies and practices. This might include:

Limiting bulk gift card purchases

Imposing limits on the number of gift card sold per transaction won’t stop the fraud, per se. It may help control it by imposing reasonable limitations on purchases, though.

Implementing daily spending limits

Fraudsters have to act quickly . They will typically try to use the entire balance of a stolen card in one shot. Daily limits may help prevent this.

Tracking gift card data

Merchants who track cards from purchase through redemption are more likely to spot suspicious behavior, such as several new card balances going to one account.

Monitoring marketplace site

Watch for your brand on gift card trading sites, in addition to social media markets and seller sites such as eBay. Too many cards offered by the same seller could indicate fraud.

Imposing card dollar value limits

It takes more effort to convert 25 cards to cash, each valued at $20, than one gift card valued at $500. There are lower margins per card. Limiting value amounts may make your cards less enticing to fraudsters.

Securing data

Save gift card activation to the end of transactions. Teach employees to double-check all cards prior to activation for any sign of tampering.

Monitoring card activation

Fraudsters know you’re extra busy during the holiday rush. This is exactly why you can’t afford to let security slide. Double down on data security to avoid IT glitches and data breaches.

Getting Help with Prepaid Card Fraud Prevention

Merchants can take steps to actively identify and stop fraud. That said, it eally can be a full-time job.

Fraud prevention diverts time and resources from more profitable pursuits, like growing the business. Many retailers have discovered that they can save significant amounts of time, stress, and revenue by turning fraud prevention efforts over to third-party solution providers.

At Chargebacks911®, we can help you do much more to prevent fraud (and the accompanying chargebacks). We’re experts at recovering revenue lost to all types of fraudulent activity. To learn more, contact us today.

FAQs

How are gift cards used for fraud?

In general terms, anyone requesting to be paid for a good or service with a gift card or prepaid credit card is probably a scammer.

Here’s an example of how a gift card scam is pulled off: You get a phone call from someone who says they’re from a government agency, like the Social Security Administration. They say your bank account will be frozen for an investigation and tell you to buy gift cards to avoid getting arrested. They target gift cards because they’re equivalent to cash, and are easily transferable but hard to track.

How does gift card fraud work?

There are multiple ways to commit fraud through gift cards. Some of them are quite sophisticated; for example, thieves may employ an automated algorithm to roll through a list of potential account numbers and request the balance. If the result of any query returns a positive balance, the fraudster knows that the account number is legitimate, and the account contains funds.

A few of the more common schemes include using stolen payment data, account takeover, targeting loyalty points and rewards, and using phony balance checks.

Can you get your money back if you get gift card scammed?

If you contact the retailer who issued the card, there is a possibility that you might receive a refunded balance or a store credit for the missing amount. Don’t count on it, though. Gift card issuers are not necessarily on the hook for scams perpetrated outside of their regular business uses.

Gift cards equate to cash and don’t feature the same protections as credit and debit cards. Any funds that are loaded onto a card and then removed are essentially gone. It will be very difficult to trace the lost funds or retrieve them.

What to do if you have been gift card scammed?

First, you should call the police and file a police report about the situation. Give them copies of all documentation you have in relation to the crime. With the police report in hand, contact the business or retailer that the gift card came from to inform them of the fraudulent card, and see if they are able to provide any assistance.

Next, contact the FTC to file a consumer fraud report. You may save someone else from being victimized by the same type of scam.

Gift Card FraudPrepaid Card Scam Prevention Tips for Merchants and Consumers

In a Nutshell